Harmful Regulations Hit Close to Home

I returned home last night to a disturbing scene. Someone was moving his things into one of the vacant flats downstairs. “Are you moving in?” I asked. “No. MCD guys were here. They kicked us out of our flat and demolished it.” I quickly went up to see. Their place looked like it had been hit by a bomb. Half of their ceiling—a giant concrete slab, one foot thick and 11 feet long—hung ominously in the centre of the room; above it, a gaping hole opening to the sky. Chunks of rubble and dust covered the floor and furniture that remained in the room. “What happened?” I  said, thinking that it looked like a war zone. “We heard a knock and opened the door to see who was there. MCD guys said, ‘move your stuff into other rooms!’ and then broke down the roof.”

Next I learned that my friends, families who live in the other two flats upstairs from me, must also vacate as soon as they can to avoid a similar fate.  Fortunately, none of them had been there when MCD (Municipal Corporation of Delhi) came.  If they had been, they would have been made immediately homeless without sufficient warning to make alternate arrangements.

What struck me so palpably is that these three perfectly good apartments, a whole bundle of valuable goods, were to be obliterated from existence. The action seemed completely tragic from an economic point of view. It pierces the heart when we understand that wealth comes not from creating scarcity of goods but by their abundance. There are many homeless people in the city and many many others who live in make-shift shacks. Yet, perfectly good apartments are being destroyed reducing the supply of housing.

Why has this happened? Apparently, the building has been deemed to have one more floor than was authorized. The landlord had not acquired sufficient licenses for what he had built. It is clear that some form of regulation (either market or governmental) is needed to be sure that some peoples’ actions do not bring harm to others.  This is certainly relevant in Delhi, where there is a moderate risk that earthquakes could cause problems to structurally unprepared, tall buildings.

But rather than blaming the landlord outright, it is important to understand how hard and costly it is to stay on the right side of the law in this matter. The World Bank Doing Business Index ranks India 181 out of 183 in ease of dealing with construction permits. (Delhi is ranked joined-fourth within India.) People generally have little expectation that such formalities have been followed.

Think about the waste and loss of resources being cause by this mis-coordination: all the concrete, steel, labour effort, copper wire, ceiling fans, etc., that had gone into the construction, not to mention the resources being used to demolish this wealth and to retrofit the remaining floors that could otherwise have gone to more productive purposes. Wealth and value is being turned to dust—literally. Moreover, the tenants must also pay the expense of finding new places to live, time searching, money spent paying brokers, effort to move all of their goods. This excludes the stress and anguish they must feel.

(The interest of the MCD officers seems not to be the height of the building, per se, which constitutes the danger to others, but instead with destroying the economic viability of the flats. It remains to be seen what will have to happen with the top floor.)

It might be different if this were a one-off occasion, the consequence of breaking a hard and fast law. But this is not the case. The biggest problem, it appears to me, is the absence of the rule of law, a clear set of rules consistently applied to all.

There is little security of property rights or a low-cost way of coordinating productive activity with the rights of others. Without this rule of law, it is difficult for everyone involved to know what the rules are and what will be enforced. The landlord was unclear, the tenants were unclear. (Tenants of the building had all received official police verification that they were living on these premises.) What remains is not the rule of law but the arbitrary rule of men. This lack of clarity makes the “Warrant to Demolish Fourth Floor” issued by the court a warrant for the authorities to intimidate and extort. (Rumour has it that the bribe for leaving the three flats on the top floor was an absurd Rs. 25 Lac!)

In addition to the sheer loss of resources due to past error and mis-coordination is the increased uncertainty investors face when making decisions for the future. This principle applies from the smallest to the largest scale. The people whose flat was destroyed had recently invested in carpet for their apartment, which is now ruined. My friends invested in a new key, which is now useless. These are trivial examples, but the principle is significant when generalized. Why make numerous minor improvements when it all might come to nought? (Having lived in the US and UK extensively, the striking thing about the quality of life in Delhi is not that anything is absolutely absent, but how the quality of almost every material thing and service seems to be lower quality.  It is these little things, like straws on a camel’s back, that lead to a rougher overall quality of existence for the average person here.)

The same principle applies to the supply of housing. Increased voluntary investment would lead to higher availability and quality of housing and to lower prices. But heavy construction licence requirements, tenancy laws, rent controls, and unclear rules and arbitrary enforcement makes people choose to restrict their investments in construction (especially in non-“luxury” housing). The landlord in my building, instead of investing in more such buildings, may choose not to take up as many opportunities to produce more housing. Others surely have had or have seen similar experiences leading them to restrict their investments, too. These all reduce the supply.

Reducing the supply or restricting its growth, of course, means that the demand causes a higher price than there would otherwise have been. My friends must now move elsewhere, increasing the demand for other apartments, pushing up their prices, ultimately displacing those of lower income and connections. People must live in more cramped, low-quality conditions, or be homeless.

Thankfully, the Delhi Development Authority has proposed that height restrictions on buildings, per se, should be removed in 2021 because of growing demand and the costs of growing horizontally.

While contemplating the lunacy and injustice of these events, I recall that these problems are faced to a much greater extent by the very poorest who operate far more in the “informal,” unlicensed sector. They cannot afford to make themselves formal and benefit as fully from cooperation in the formal market. They are more open to harassment. It is even harder for them to invest and build wealth with the resources they have. Burdensome and arbitrary regulations like these cause wealth destruction, stagnation, and remove the bottom rungs of the ladder of economic self-advancement.